Question

4. NJ announces a new law to lower the capital gains tax rate in two years (i.e. 2021). Discuss three ways this will affect people’s actions, both before and after 2021. (Be sure to discuss capital gains realizations and bequests.)

Answer 1

1) Capital gains are the taxes which are charged on the gains arising from sale of a capital asset under a particular law or legislature.

2) Capital gains can take form of short term capital gains or long term capital gains depending upon the period of time the capital asset was held prior to it's sales.

3) Reduction in capital gains affects assessee's financial planning in many ways. Following are some of the examples of it:

a) If assessee's know that capital gain tax rates are going to get reduced, they will delay their disposal of capital assets so as to lower their capital gain tax.

b) On the other hand assessee's who are willing to buy capital assets will prepone their buying decisions, since reduction in capital gain taxation will shoot up the rates of capital assets

c) Reduction in capital gain taxes will give an incentive to foreign investor. In turn there will be more foreign investment.

Hence from capital asset buyer's perspective they will increase buying of capital assets before 2021.

From seller of capital asset's perspective and foreign investor their activities will increase post 2021.